- I think TechTarget has the capacity to blow away analyst revenue and EBITDA estimates.
- Revenue growth combined with a very fixed cost base = rapid EBITDA margin expansion.
- Putting a reasonable multiple on 2016 EBITDA suggests a $24 price target.
Please see my earlier article for background on TTGT's business.
TechTarget (NASDAQ:TTGT) has had a busy couple of months. First came Q1 numbers well ahead of expectations and increased guidance for 2014, which drove a 20% increase in stock price. Then came the announcement of a secondary by selling shareholders which drove the stock price back down to where it had been before the Q1 earnings report. The secondary was completed successfully and the stock popped by 20% again over the next two weeks.
If that was not enough excitement, a short seller came out with a negative report on TTGT based on Google's new search algorithm which sends less traffic to TTGT's website. The stock quickly dropped 15% on that report, but recovered fully after the company responded with a well thought out press release rebutting the short seller's argument. Finally this morning, Needham and Jefferies initiated coverage on TechTarget with Buy ratings and $11 and $12 price targets respectively.
When looking at the analyst reports, I was struck by what seemed to be very conservative numbers for revenue and EBITDA for 2014 and 2015. Numbers for 2014 were in line with recent management guidance at 14% revenue growth and 80% EBITDA growth, but I think based on our own models that TTGT could end up with 20% revenue growth this year and over 100% EBITDA growth. Given the explosive growth of IT Deal Alert, TechTarget's new product, I think revenue could grow again by 20% in 2015 and 2016 and EBITDA margins could expand to 28% in 2015 and 34% in 2016. While these numbers are up significantly from 2014, they are below management's ultimate 40% EBITDA margin target. A 15x EBITDA margin seems appropriate given TTGT's revenue growth and potential for additional margin expansion, and applying that multiple to our estimate of $51m in 2016 EBITDA (plus the cash), that gets you to a $24 price target.
The main risk to the story would be a meaningful decline in IT spending for enterprises, which would blunt TechTarget's core business of selling leads to IT vendors. Gartner is currently predicting a 2% rise in IT spending this year which would be fine for TTGT as its core business would be supported giving its international business and IT Deal Alert room to run.
There is also the possibility of an acquisition of the company somewhere down the road as it has unique and actionable data than cannot be found elsewhere. A large data company like Thomson Reuters or Bloomberg could find its buyer intent data interesting as a complement to what they already have. I do not think management and large shareholders are looking to sell at these price levels given the potential upside in the story but at some later point this could be an endgame for the company.
Disclosure: The author is long TTGT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.